THE UNCERTAINTY OF SOCIAL SECURITY BENEFITS

February 4, 2005

Compared to Social Security benefits promised under current law, individuals would receive higher benefits with personal accounts funded by the diversion of 2 percentage points of the payroll tax and invested in stocks and bonds. So concludes a new study by Congressional Budget Office researchers. The caveat is that uncertainty regarding the level of benefits would increase because of variations in investment returns.

However, the study did not determine the risk that retirees will not receive the level of Social Security benefits promised under the current system -- given the projected gap between payroll tax revenues and benefit payments. This risk is real.

Developed countries have responded to retirement pension shortfalls by cutting future benefits. They have increased retirement ages, indexed benefits to prices rather than wages and lengthened the years of earnings averaged to determine benefits. As John McHale of Harvard University detailed in 1999, these changes often have different effects on expected benefits for men and women:

In 1983, the United States cut projected benefits 24.6 percent for men and 16.0 percent for women.

In 1986, the United Kingdom reduced projected benefits 22.8 percent for men and 16.9 percent for women; in 1994 benefits were further cut 5 percent for men and 29 percent for women.

In 1992, Germany scaled back benefits 7.3 percent for men and 26.2 percent for women.

In 1992, Italy reduced projected benefits 38 percent for men and 29 percent for women.

In 1993, France cut the expected value of future retirees' benefits an average of 13.5 percent for men and 15.3 percent for women.

In 1994, Japan cut projected payments 14.8 percent for men and 12.4 percent for women.

Despite these changes, many countries still face shortfalls, with the exception of public pension systems that have been reformed with personal accounts.

Source: Amy Rehder Harris, John Sabelhaus and Michael Simpson (all of the Congressional Budget Office), "Social Security Benefit Uncertainty Under Individual Accounts," Contemporary Economic Policy, January 2005; and John McHale, "The Risk of Social Security Benefit Rule Changes: Some International Evidence," National Bureau of Economic Research, Working Paper No. 7031, March 1999.